The High Court has recently considered a test case under s.138D of the Financial Services and Markets Act 2000 (FSMA), in the context of alleged breaches of statutory obligations under the Consumer Credit Sourcebook (CONC) for failing to take repeat borrowing into consideration when making lending decisions: Kerrigan v Elevate Credit International Limited (t/a Sunny) (in administration) [2020] EWHC 2169 (Comm). The court also considered a claim for an order under s.140B of the Consumer Credit Act 1974 (CCA) on the basis that the relationship between the lender and the borrower was unfair to the borrower.

The decision relates to claims against a payday lender, in which a group of sample claims (reflecting a wider group of claimants) were tried together. The court determined finally the allegations against the lender for breach of CONC, and although no final conclusions were reached in respect of individual claims under s.138D FSMA or s.140B CCA, the court provided some helpful guidance as to the merits of the arguments. The issues considered will be of interest to lenders and financial institutions more generally.

In summary, the High Court held that the lender’s failure to take repeat borrowing into consideration when making its lending decisions resulted in a breach of its obligations under CONC 5.2, in particular, the obligation that a creditworthiness assessment consider both the potential for the commitments under the credit agreement to adversely impact the customer’s financial situation and the ability of the customer to make repayments as they fall due.

On the key question as to whether breach of statutory duty under CONC was actionable under s.138D FSMA, the court emphasised that a borrower must show that damage was caused, both in fact and as a matter of law, by the lender’s breach of duty. The court reflected that it may be harder for a borrower to prove causation in circumstances where it may be said that – following a robust creditworthiness assessment – the borrower would likely have applied elsewhere to a third party lender able to extend the credit.

The court also provided guidance on the s.140B CCA claim, noting that the court will have regard to compliance with the CONC rules, which articulate the consumer protection objective. However, although important, a breach of the rules will not be the only factor considered when assessing fairness. In particular, where a borrower is dishonest in the information they provide as part of the loan application, to the extent it has a direct effect on the existence of the creditor-debtor relationship, this may undermine any claim by the borrower that the relationship was unfair.

For a more detailed discussion of the decision, please see our FSR blog post.